Commercial Loan Pricing Update (May 2022)

Since March 2020, we’ve posted regular updates on the commercial loan pricing markets based on what we’ve seen when examining the PrecisionLender dataset. We look at several popular metrics and point out areas in which there have been noteworthy changes.  

In this report, we’ll take a closer look at three key takeaways from the May 2022 data: 

  • There has been varying change in coupon rates compared to market rates across structures. SOFR and Prime coupons are moving with their index.
  • Fixed-rate coupons show less elasticity. 
  • Swap structures benefit both borrowers and lenders compared to the fixed-rate alternative.  

If you’d like to see our previous loan pricing market updates, you can find them here.  

If you have questions about metrics that have appeared in previous posts but not this latest one, please reach out to us at insights@precisionlender.com.  

NOTE: PrecisionLender’s data reflects actual commercial opportunities priced (loans, deposits, and other fee-based business) by more than 150 banks in the United States, ranging in size from small community banks to top 10 U.S. institutions. In addition to their variance in size, these banks are also geographically diverse, with borrowers in all 50 states. 

May Activity Hangs With March and April 

The past three months have shown a steady pace of pricing activity. The rate hikes on March 18 and May 4 have added 75 basis points (bps) to short-term index rates like Prime, Fed funds, and SOFR. Bankers and borrowers have not been deterred or even blinked an eye. The mix of pricing activity is mostly unchanged month over month at 34% fixed, 31% SOFR, and 16% Prime structures.    

Priced Commercial Loan Volume by Month 

(Indexed to July 2021 = 100)

SOFR Spread Maintained Nearly 250 Basis Points 

Month after month, we notice consistency in the overall spread to SOFR since being widely adopted in late 2021. The past five months show an increase of 7 bps, and only a 3 bps increase over the past three months.  ​ 

Weighted Average Spread to SOFR 

However, the SOFR spread is lower on longer maturity. The 5-to-10-year tranche shows a lag of about 25 bps to the 1-to-36-month tranches. This lag is narrowing from about 40 bps in March data. In addition, bankers place a premium on funding costs for the 5-to-10-year tranche compared to shorter periods—about 17 bps in May. The result is lower profitability for this segment compared to shorter maturities.   

Spread to Index, by Maturity Tranche, SOFR Loans Priced 

Prime-Based Loans Absorb Coupon Increase With Steady Spread to Index 

Bankers and borrowers appear to have absorbed May’s 50 bps Prime rate increase without a skip: Volume is unchanged, spreads are nearly flat, and overall coupon is up 78 bps since February and 44 bps in May over April. The coupon drives toward a net interest margin of 3.57% for May—well above fixed and SOFR comparison points of 1.73% and 2.41%, respectively.    

Weighted Average Spread to Prime

Coupon Rates Show Elasticity With Market Rates, but Not Equal by Rate Type 

Because bankers have maintained spreads to SOFR in recent months, the SOFR coupon tracks with changes in the SOFR index: Coupon is up 75 bps in May versus February, and index is up 73 bps. Prime-based coupons have also moved up approximately 75 bps.   

In contrast, fixed-rate structures are not as elastic, with coupon up 83 bps compared to 60-month Treasury (proxy for an index) up 95 bps. Note that the fixed-rate movement has improved: It was about 61% of the movement in December through February versus 87% in February through May.   

Coupon Rate by Month, Rolling Trend 

SOFR Coupon and Index Trend

Fixed Coupon and 60-Month Treasury Trend

 

Floating Rate Type and Pricing Varies by Banking Segment 

Community banks have adopted SOFR, so far, to represent about 35% of floating-rate loans priced compared to 65% for the regional banking segment. We reported a few months back that regional banks had moved more quickly into SOFR compared to community banks.  

In addition, we’ve tracked the respective overall spreads to the SOFR index and find consistent year-to-date premium of about 60 bps for the community banks (at about 300 bps) versus regional banks (at about 240 bps). In contrast, Prime spreads vary little (6 bps) across the segments at 36 bps and 30 bps, respectively.       

Mix of Floating Rate Loans Priced by Banking Segment, May 2022

Swap Structures Track Fixed-Rate Structures on Coupon, Edge Higher on Net Interest Margin Percentage 

We examined the regional bank segment (represents most of Swap activity) for 5- and 10-year structures (represents most dollar volume) to compare the economics of Swap structures to fixed-rate structures at the net interest margin level. We also found that Swaps as a percentage of fixed-rate pricing have increased from 15% in January to 27% in May—nearly doubling relative volume.  

We have reported several times on the spread to SOFR on Swap structures at about 1.85% YTD. Swaps have the benefit of about 25 bps of Swap fees, which PrecisionLender presents on an average annual basis (not as an upfront revenue item). The results show that Swap structures provide borrowers about 12 bps in coupon advantage as of May, and February through May shows a very narrow range of 2 to 12 bps in overall coupon (all else equal). The net interest margin comparison is not as consistent YTD, with Swap results edging out fixed rate by 4 bps in the May data. We’ll continue to monitor these comparative values.  

Fixed-Rate Coupon Versus Indicative Fixed Rate Via Swap Structure

Fixed-Rate Versus Resultant Floating Rate Swap Structure 

Economics to the Institution

Got Questions?   

Our banking consultants and data scientists are combing through PrecisionLender pricing data every day. If there is anything you’d like to know about what they’re seeing, please send your questions to insights@precisionlender.com.

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